The power of low cost diversified investing

Transcription

1 The power of low cost diversified investing Robin Bowerman Head of Corporate Affairs, Vanguard Australia YOUR SELF-MANAGED SUPER SHOW event partner

2 The case for indexing When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. Warren Buffett, 2016

3 Investors recognise the benefits of low costs $ 1, Cumulative equity fund net cash flows by cost quartiles $760B Lowest-cost quartile 600 Billions $183B $234B $293B Second-lowestcost quartile Notes: Expense-ratio quartiles were calculated annually. Equity funds represented by Morningstar US equity category. Each quartile represents 2016 asset-weighted average expense ratios, determined by multiplying annual expense ratios by year-end assets under management and dividing by the aggregate assets in each quartile. Data are as at 31 December Source: Vanguard calculations, based on data from Morningstar, Inc.

4 The majority of active funds underperform

5 Understand what you are investing in Some index assets are in fact active

6 Spectrum of returns

7 Consistently picking winners is difficult Asset Class 25.2% 14.9% 38.4% 26.2% 11.4% 32.8% 32.3% 27.7% 14.4% 13.2% 27.1% 16.2% 9.2% 37.6% 13.1% 10.5% 26.3% 19.7% 26.8% 6.0% 11.8% 20.0% Intl Equities: EM Intl Equities: DM Hgd 6.7% 7.6% 30.5% 9.3% 5.0% 19.7% 13.0% 12.6% 3.8% 11.7% 11.9% Aus Equities 6.6% -38.9% 26.7% 6.0% 1.9% 18.7% 7.3% 10.4% 3.3% 10.3% 6.4% Aus Property 6.0% -39.1% 9.6% 4.7% -1.6% 16.7% 6.3% 9.8% 2.8% 6.7% 6.3% 3.5% -41.2% 8.0% 4.3% -1.9% 9.7% 2.9% 6.9% 2.6% 5.2% 3.7% -8.4% -44.4% 3.5% 1.9% -11.0% 7.7% 2.3% 5.3% 2.3% 2.9% 3.7% Intl Property Hgd Global Agg Hgd Aus Fixed Interest -17.8% -55.3% 1.7% -0.7% -18.4% 4.0% 2.0% 2.7% -4.3% 2.1% 1.7% Cash Source: Vanguard Investment Strategy Group analysis using index data from Bloomberg, Barclays, FTSE, MSCI, S&P & UBS. Notes: Australian equities is the S&P/ASX 300 Index; Australian Property is the S&P/ASX 300 A-REIT Index; International Property Hedged is the FTSE EPRA/NAREIT Dev x Au Hedged into $A from 2013 and UBS Global Investors ex Australia AUD hedged Index prior to this; International Shares Hedged is the MSCI World ex-australia Index Hedged into $A; Emerging Markets Shares is the MSCI Emerging Markets Index; Australian Bonds is the Bloomberg Ausbond Composite Bond Index; Global Aggregate Bonds is the Bloomberg Barclays Global Aggregate Index Hedged into $A; Cash = Bloomberg AusBond Bank Bill Index.

8 Balance 180 The importance of rebalancing, regardless of market conditions Trough to Peak February 28, % 160 Three investors with the same balanced portfolio, 50% Equity and 50% Fixed income. Then the GFC hits. 93% % Portfolio moved into 100% Fixed Income Portfolio kept in line with asset allocation through ongoing rebalancing 27% Portfolio moved into 100% cash 60

9 Balance The impact of rebalancing February 28, % Trough to Peak 50/50 93% Fixed Income 71% 80 Cash 27% 60 Source: Vanguard based on data from Thomson Reuters. Stay the course invests in 50% S&P ASX 300, 45% MSCI World Index, and % MSCI Emerging Markets. The Performance Chasing strategy invests the value of the assets at the beginning of each year into what was the previous year s best performer between the S&P ASX 300, MSCI World Index, and MSCI Emerging Markets Index. The Contrarian strategy invests the value of the assets at the beginning of each year into what was the previous year s worst performer between S&P ASX 300, MSCI World Index, and MSCI Emerging Markets Index.

10 100% Rebalancing is hard, so asset allocations show trend following 90% Money Market Allocation Among Asset Classes (%) 80% 70% 60% 50% 40% 30% 20% 34% 62% 40% 63% 38% 63% Bond (Taxable + Muni) Equity (US + Int l + EM) 10% 0% Source: Vanguard calculations, using data from Morningstar. Data as of 31 December 2017.

11 Typical asset allocation of SMSF portfolios Australian bonds 30% Source: Vanguard/Investment Trends, 2017 Self Managed Super Fund: Investor Report. Copyright 2017 Investment Trends Pty Ltd Reproduced by Vanguard with the permission of Investment Trends.

12 Three ways to use ETFs Thematic portfolio construction Asset class construction Core Portfolio construction

13 Thematic portfolio construction Around the world in 3 trades VTS VEQ VAE Vanguard US Total Market Shares Index ETF Vanguard FTSE Europe Shares ETF Vanguard FTSE Asia ex Japan Shares Index ETF

14 Thematic portfolio construction Around the world in 3 trades Implement a single trade idea Building blocks for international equity exposure VTS VEQ VAE Dial up or dial down with flexibility and control

15 Asset class construction Meet John and Eleanor Mid-50s, two income family Current portfolio composed of domestic equities and cash International Equities VGS - Vanguard International Shares Index Fund VGE Vanguard Emerging Markets Shares ETF

16 Asset class construction international equities Growth of $100, July July 2016 MER: 21bps 90% VGS 10% VGE 90% Global developed markets: VGS 10% Global emerging markets: VGE $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 Correlation to MSCI ACWI Portfolio MSCI ACWI in AUD Source: Morningstar, 10 years to July 2016.

17 Asset class construction international equities 5yr standard deviation falls 24%. Over 5,500 securities across 40 countries Global developed and emerging markets for 21 bps The flexibility to switch VGS into VGAD (hedged) Flexibility of adding emerging market exposure total return % VLC + International equities Lower risk 6.0 Australian large 5.0 caps (VLC) yr standard deviation % Portfolio consists of VLC: 60%, VGS: 36%, VGE: 4%. Source: Risk and return data from Morningstar, five years to 14 July 2016.

18 Asset class construction Matt and Sally need additional income assets Early 60s, one income Current portfolio composed of domestic equities, international equities and cash International Fixed income VIF - Vanguard International Fixed Interest Index Fund (Hedged) VCF - Vanguard International Credit Securities Index Fund (Hedged)

19 Asset class construction - international fixed income Growth of $100, July July 2016 MER: 23bps 65% VIF 35% VCF 65% International Fixed Interest: VIF 35% International Credit Securities: VCF $250,000 $200,000 $150,000 $100,000 $50,000 Correlation to Barclays Global Agg Portfolio Barclays Global Agg Source: Morningstar, 10 years to July 2016.

20 Asset class construction: fixed income + int l equities VIF VCF 18% VAF 12% VLC 30% VGS 36% Source: Risk and return data from Morningstar, five years to 14 July Original portfolio VLC versus comparison portfolio. Asset allocations are an example only.

21 Asset class construction: fixed income + int l equities VIF VCF 18% VAF 12% VLC 30% VGE 4% VGS 36% Source: Risk and return data from Morningstar, five years to 14 July Original portfolio VLC versus comparison portfolio. Asset allocations are an example only.

22 Asset class construction: fixed income + int l equities International Fixed Income VIF VCF 18% Domestic Fixed Income VAF 12% VLC 30% VGE 4% VGS 36% Source: Risk and return data from Morningstar, five years to 14 July Original portfolio VLC versus comparison portfolio. Asset allocations are an example only.

23 The case for hedging While international investing provides good opportunities for investors, it also comes with some risks. Currency fluctuation is one of them. Hedging (trading in foreign currencies for AUD) can help reduce the impact of currency risk on your international investment returns.

24 Asset class construction: fixed income + int l equities Portfolio volatility has now fallen 51% Ballast against poor performing equity markets Added over 10,000 stocks and bonds in five trades Domestic and international fixed income for 23 bps. total return % VLC + Fixed income + International Equities VLC + International Equities Lower risk yr standard deviation % Australian large caps (VLC) Source: Risk and return data from Morningstar, five years to 14 July Original portfolio VLC versus comparison portfolio. Asset allocations are an example only.

25 Core portfolio construction Meet Sam Early 40 s Has ~$280k in super Invested in stocks and cash Wants low cost investments Core portfolio construction Model portfolios using ETFs

26 Vanguard s Diversified ETFs

27 Vanguard Diversified Index Funds: quartile rankings Conservative Balanced Growth High Growth 1 year 1 st 2 nd 1 st 2 nd 3 years 1 st 1 st 1 st 1 st 5 years 1 st 1 st 1 st 1 st 7 years 1 st 1 st 1 st 1 st 10 years 1 st 1 st 1 st 1 st Quartile ranking guide 1 st quartile 2 nd quartile 3 rd quartile 4 th quartile Peer group only includes surviving funds and has not been adjusted for survivorship bias. Source: Morningstar, May 2017

28 The benefits of ETFs Low cost Vanguard ETF fees are usually significantly less than actively managed funds. ETFs are more cost efficient than investing in the same exposure of individually purchased shares. Diversification Vanguard ETFs provide investors with a highly diversified domestic and international stock and bond portfolios with the convenience of ASX execution.. Tax efficiency The traditional low turnover of indexing complemented by Vanguard's unique ETF structure enhances after tax returns over the long term. Liquidity Vanguard s ability to create and redeem ETF units on a daily basis ensures a unique benefit of ETFs liquidity on request. Secondary sources of liquidity exist in the volume of trading of the ETF itself and the investment environment it is trading in. Transparency Vanguard provides regular information to the market ensuring transparency of pricing and transparency of ETF holdings.

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32 Important information This presentation contains general information and is intended to assist you. In preparing the above information, individual circumstances, for example tax implications, have not been taken into account and it may, therefore, not be applicable to an individual s situation. Before making an investment decision, you should consider your circumstances and whether the above information is applicable to your situation. Past performance is not an indication of future performance. Vanguard Investments Australia Ltd (ABN / AFS Licence ) ( Vanguard ) is the issuer of the Vanguard Australian ETFs. Vanguard is the issuer of the Prospectus on behalf of the US listed ETFs described in the Prospectus. Vanguard has arranged for interests in the US ETFs to be made available to Australian investors via CHESS Depositary Interests that are quoted on the AQUA market of the Australian Securities Exchange ( ASX ). Vanguard ETFs will only be issued to Authorised Participants, that is persons who have entered into an Authorised Participant Agreement with Vanguard. Retail investors can transact in Vanguard ETFs through a stockbroker or financial adviser on the secondary market. Investors should consider the relevant Prospectus and/or Product Disclosure Statement ( PDS ) in deciding whether to acquire Vanguard ETFs. Retail investors can only use the Prospectus and PDS for informational purposes. You can access the PDS and/or Prospectus at vanguard.com.au. Vanguard is not offering the ETFs described in this presentation in the United States and this presentation does not constitute an offer or an invitation to apply for or acquire any interests in the ETFs in the United States. The information contained in this presentation is not intended for US persons as defined in Regulation S under the US Securities Act. About Vanguard Capital Markets Model (VCMM) The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard's primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include Australian and international equity markets, several maturities of the Australian Treasury and corporate fixed income markets, international fixed income markets, money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the VCMM is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time Vanguard Investments Australia. All rights reserved.